Recent volatility in both the equity and debt markets, along with global macroeconomic concerns are continuing to impact hotel underwriting, out year forecasts and resulting asset values.
While current operating fundamentals continue to remain positive despite softer August trends, and short term forecasts are still strong (the most recent STR forecast calls for 6% RevPAR growth in 2016), underwriting (by both equity and debt sources) has become less aggressive and now includes slower growth in the out years, resulting in an impact on hotel asset values.
Transaction activity has also shifted in recent months– with REITs and some levered buyers on the acquisition sidelines. The disconnect between public market and private market values continues to impact the REITs’ ability to acquire; this coupled with the recent increase in their cost of capital, has caused most of the REITs to be out of acquisition market, resulting in a slight increase in cap rates.
Overseas capital appears to have filled some of the void, and buying interest from foreign capital (particularly Asian capital) has increased over the past several months given the recent global macroeconomic turmoil, with US real estate presenting an attractive long-term option compared to domestic concerns in Asia. However, the majority of this foreign capital has targeted trophy assets in gateway markets.
Additionally, the recent debt market volatility has increased all-in debt costs, with spreads rising 30-50 bps over the past several weeks. Bond spread gaps have widened as debt markets price in more risk. BBB REIT bond spreads have reached a three-year high at approximately 212 bps over the comparable 10-year Treasury yield, and bellwether Host Hotels and Resorts’ most recent bond offering is indicative of these heightened risk premiums in today’s market. In early May, Host priced a 4.0% coupon, $500 million bond offering (June 2025 maturity) at a 4.02% yield to maturity, a 178 bps spread to the 2.24% benchmark Treasury yield; in early October, Host priced a 4.5% coupon, $400 million bond offering (February 2026 maturity) at a 4.54% yield to maturity, a 248 bps spread to the 2.06% benchmark Treasury yield. The 70 bps increase in spread reflects greater investor uncertainty amidst slowing global growth and mixed economic indicators.
Rising all-in debt costs have caused some leverage-focused buyers of hotels to remain on the sidelines. This along with a slight increase in cap rates, and less aggressive out year underwriting, has contributed to hotel real estate values resetting approximately 5% lower in recent months.
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